Article summary
The article by (Li and Chow) develops a detailed account for china’s economic development and growth from 1952. In doing so, the article focuses on areas such as total factor productivity, capital, and labor. Official data on the economic status of the country, the authors develop an estimation of Cobb-Douglas productivity function. The article is an extension of earlier works by Gregory Chow and there are two main aims that the authors pursued.
They include establishing whether the earlier parameters of production function changed and using these parameters to make projection of growth in GDP up to 2010. Data on essential parameters such as national output and labor force were readily available. The only parameter that had changed was the Chinese national accounting income system. It had changed from the old definition of accounting national income accounting system to a new definition that uses the standard measure of GDP.
The article by Wang and Yao, examines the sources of China’s economic growth from 1952 to 1999. The authors note the remarkable performance of Chinas economy within the period. In addition, the country has also made significant effort in reducing poverty. However, in order to establish the source of this immense growth, the authors examine factor accumulation and productivity.
Most studies focusing on China’s economy fail to incorporate data on its annual human capital stock (Wang and Yao). This leaves a huge omission and biasness in the studies rendering them inaccurate. The article by Wang and Yao, however, sought to use data of China’s human capital stock to analyze the economic growth of the country. In addition to the human capital stock data, the authors also identify the significance of using factor productivity in analyzing China’s economic growth.
China’s economic growth since 1978
Ever since China implemented economic reforms in 1978, the country has continued to witness impressive economic growth that leaves many economic analysts in the western world wondering the factors that drive this growth. On one end of the spectrum, the situation has increased fears that China will soon become a powerful country and a threat to well established western countries.
On the other end, there are those who choose to become pessimistic about China’s economy (Holz). However, one thing remains, irrespective of what end of the spectrum one chooses to stand China’s economy has grown at a rapid rate ever since they began implementing economic reforms. Gross domestic product has been on an average annual rate of 9.6 percent.
In terms of economic size, the country currently is ranked second to the United States after surpassing huge economies such as Japan, Germany and UK. The Share of China’s economy in the global economic growth has is currently ranked the highest. Basically, it contributes to approximately 25 percent of the global economic growth while the United States is estimated to contribute only 20 percent (Holz 1668).
The interest in China’s impressive economic growth has drawn many researchers to analyze the factors that drive the economy. Other researchers have focused on China’s largest industries which contribute a significant share to its overall GDP while others examine the prospective of China’s firms on the global spectrum. Theories that explain China’s economic growth tend to emphasize on the economic transition.
As part of the economic reforms, China opened its market to foreign investors (Holz). A cumulative figure of the overall foreign direct investment in China had reached $100 billion by the year 1995. However, this figure was negligible prior the economic reforms of 1978.
Annual inflows of foreign investments increased from 1% in 1978 to 18% in 1995. With the increase inward foreign investment, the government has been using the money to create technological transfer, connect the country to international market, create job opportunities, and to build factories.
With the growing power and global presence of China in the world economy, there is no doubt that it is gaining foothold as the world’s strongest economy (Chow). Critics argue that the economic superpower of China can be attributed to its ability to embrace the market economy using utterly brutal means.
Capitalism and one-party communism are some of the factors that enabled the Chinese economy to address effects of the financial crisis. There is no wonder that the Chinese suffered from the effects of economic ideologies put forward by Friedrich Hayek given the levels of ease in accessing Chinese credits and embarking on overambitious projects. According to Hayek, bad investments lead to hard economic recoveries and this explains the woes that are currently being experienced in China.
China’s involvement in the global economy subjected it to the effects of the economic downturn. The rate of economic rate declined steadily from 14%, 9%, and 6.1% in 2007, 2009, and at the first quarter of 2009 respectively. The Chinese economy suffered external shocks from the free fall in international demand and the collapse of commodity markets. For the past two decades, foreign direct investment and international trade accounted for US870 billion and US$2.56 trillion respectively.
Equally, $1.95 trillion of Chinese foreign reserves is invested in foreign agency and government bonds. An estimated 25 million employees in the Chinese labor market, work for foreign companies operating in China (Holz). With all these factors, there is no doubt that the Chinese political and economic health is reliant to the global economic markets. These interconnections mean that any undesirable developments in global markets present undesirable effects to the Chinese economy.
During the global financial crisis, assets were devalued, financial markets became turbulent, unemployment levels rose, and access to credit became limited during the crisis. The onset of the financial crisis marked the end of the highest growth cycle experienced from 2003-mid-2008China suffered the pains of the credit crunch in other ways.
The shrinking international trade resulted to a reduction in China’s involvement in international trade. Small-and mid-sized manufacturing and trading companies collapsed leading to job losses for over 20 million migrant Chinese workers (Holz). Chinese trade relations with the European Union and the US were impacted significantly. Majority of these markets formed the largest consumers of Chinese exports, and the effects of the credit crisis led to slowed purchases of Chinese goods.
Political responses in response to the effects of the credit crisis included a call for rejecting economic reforms in favor of the centrally-controlled economy implemented by Mao. Another possible political response included the adoption of a protectionist/nationalist approach to Chinese growth investments. In efforts aimed at addressing the external shocks associated with the credit effects of the credit crisis, the Chinese government announced a number of macroeconomic policies.
Among these policy response was the 4 trillion Yuan (US$586 billion) stimulus package to be implemented for the duration 2008-2010 (Chow). This stimulus package was aimed at stimulating domestic demand. This translated to the inflation of China’s fiscal deficit from 0.1% in GDP to 2.9% of GDP in 2010. While this stimulus package targeted three economic pillars (funding mechanism, industrial policy, and investment plan), the stimulus package was criticized for relying heavily on physical infrastructure.
Also included in the stimulus package plan was the innovation and competitiveness plan that targeted 10 additional factors. Contrary to their believe of the Keynesian economy as a general theory aimed at defending capitalism, the Chinese government headed by Wen Jiabao and Hu Jintao embraced Keynesian prescriptions (Chow). The leadership regimes of Li Keqiang and Xi Jinping are expected to suffer the investment effects described by Friedrich Hayek (Chow).
Another policy response has been the implementation of the expansionary fiscal policy by exiting from its tight monetary policy. The new expansionary monetary policy enabled the government to cut interest rates and minimize bank reserve requirement ratio to improve the liquidity volumes on the banking system. The effectiveness of several industrial policies implemented to promote the growth and recovery of particular sectors in the economy is yet to be evaluated.
The stimulus package is likely to increase China’s reliance on investments that depend on the growth model because inappropriate use of money on key sectors.
The Chinese stimulus program is criticized for relying heavily on imbalanced and unusual investment burst through bank lending, enhancing the role of the state at the expense of the private sector, and exacerbating china’s dependence on exports. The stimulus package is also criticized for neglecting consumption because the package was aimed at expanding investment demand.
Works Cited
Chow, D. “China’s response to the global financial crisis: Implications for US-China Economic relations.” Global Business Law Review (2010): 47-81. print.
Holz, Carsten. “China’s Economic Growth 1978–2025: What We Know Today About China’s Economic Growth Tomorrow.” World Development (2008): 1665–1691. print.
Li, Kui-Wai and Gregory C Chow. “China’s economic growth: 1952-2010.” Economic Development and Cultural Change (2002): 247-256. print.
Wang, Yan and Yudong Yao. “Sources of China’s Economic Growth, 1952-99: Incorporating human capital accumulation.” The world bank (2001): 1-17. Print.